A Guide to Unfair Prejudice: Shareholder Claims and Petitions Under Section 994 of the Companies Act 2006

What may have started out as a thriving business or venture can deteriorate into a situation in which one shareholder feels excluded, ignored or unfairly treated. In this situation when business relationships break down, an unfair prejudice petition represents one of the most powerful remedies available to a shareholder.

An unfair prejudice petition asks the court to intervene where a company’s affairs are being conducted in a way that unfairly harms a shareholder’s interests. The court has wide powers to provide relief, including ordering a shareholder buyout, regulating the future conduct of the company, preventing certain acts from taking place and requiring specific actions to be taken.

In this guide, we provide an overview of unfair prejudice petitions under section 994 of the Companies Act 2006, focusing on legal principles, procedure, and strategy.

Table of contents

• Legal framework
• Who can bring an unfair prejudice claim?
• Common scenarios
• Key elements
• Evidence required for a claim
• Remedies
• Seeking legal support
• FAQs

Legal framework

Section 994 allows a member (or member to whom shares have been transferred but not yet registered, or transmitted by operation of law) of a company to petition the court on the grounds that:

• the company’s affairs are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members; or
• an actual or proposed act or omission of the company (or on its behalf) would be prejudicial.

Where a company fails to register a member and that member neither acquires their shares by transfer or transmission, that member may therefore need to apply at the same time rectification of the register of members to record their shareholding.

Who can bring an unfair prejudice petition?

The following may generally bring a claim of unfair prejudice:

• Members of a company: Any shareholder who appears in the company’s registers of members.
• Share transferees: A person who has acquired shares in the company and entitled to be registered may bring a claim even before completion of registration.
• Personal representatives: Where shares pass following the death of a shareholder, a personal representative may pursue a petition of unfair prejudice.
• Majority shareholders: Less commonly, even majority shareholders can bring a claim where they have exhausted the rights available to them as the majority.
• LLP members: Although frequently “opted-out” in an LLP Agreement, it is still possible for LLP members to pursue an unfair prejudice claim.

What are common unfair prejudice scenarios?

Examples of unfair prejudice we commonly see are:

• Exclusion from management: Where one shareholder is removed from decision-making or deprived of key information, there may be grounds for unfair prejudice. This is more common in owner-managed business such as family businesses or businesses formed by friends or business partners.
• Excessive Director remuneration: When a shareholder pays themself an excessive salary or bonus, which depletes the available funds for the payment of dividends.
• Refusing to pay dividends: Even where there are sufficient reserves available to do so, and no satisfactory reason for the company needing to retain the funds.
• Breaches of a Shareholder Agreement: Where shareholders have agreed how to run a company, a broach of these terms may provide evidence of unfair prejudice. Examples include ignoring voting rights, failing to obtain required consent before an action, or breaching reserved matter provisions.
• Breaches of Articles of Association: Where for example there is evidence of unlawful share allotments or failures to comply with pre-emption rights, this may be grounds for unfair prejudice.
• Share dilution: The issuing of new shares can significantly alter the control an individual has within a company. Courts may intervene should this amount to unfair prejudice.
• Failing to provide information: Shareholders are often entitled to receive certain financial data, records and information. The deliberate withholding of this may constitute unfair prejudice.
• Misuse of company assets: If a shareholder is using company assets for personal gain, or taking the opportunity to drive business away from the company to benefit another.
• Breaches of Directors’ duties: Directors owe statutory and fiduciary duties to the company, including a duty to promote the success of the company and avoid conflicts of interest.

Key elements of the claim

The company’s affairs

The unfair conduct must relate to “the company’s affairs”.

What that means will vary on a case-by-case basis. However, there must be some tangible connection with the company and the conduct complained of.

Personal disputes between the shareholders are unlikely to be sufficient, although the affairs of either a parent or subsidiary company may be relevant considerations.

Unfairly prejudicial conduct

The conduct must be both unfair and prejudicial to the member’s interests as a member, and the prejudice suffered must have been caused by the conduct.

Prejudice is usually measured as the diminution in the value of a member’s shares, however, the court is not limited solely to financial considerations.

Quasi-partnership companies

Under English law, a quasi‑partnership refers to a company (usually a small, private one) that, although a company, operates in substance like a partnership.

It typically involves a relationship of mutual trust and confidence; an understanding the participants will manage the business together; and often restrictions on share transfers.

Since the courts recognise the equitable nature of these arrangements, they may be more willing to temper strict legal rights with fairness.

Quasi‑partnership principles are commonly invoked in unfair prejudice petitions, particularly where a member has been excluded from management contrary to that shared understanding.

What is “unfair” in an unfair prejudice claim?

What amounts to being “unfair” will turn on the specific facts of the case, save that any analysis requires an objective approach, as opposed to what the parties might subjectively consider to be unfair. There is no requirement on the petitioner to show bad faith, but the court may take into account all of the parties’ conduct when assessing conduct.

What evidence is required for an unfair prejudice petition?

Strong documentary evidence is often central to a successful petition.

Relevant documents commonly include:

• Articles of association
• Shareholder agreements
• Board minutes
• Management accounts
• Annual accounts
• Dividend records
• Share allotment documents
• Emails and correspondence
• WhatsApp and instant messages
• Bank statements
• Valuation evidence

Preserving evidence at an early stage is not only required of potential litigants in a dispute, but may significantly strengthen a shareholder’s position.

Remedies for Unfair Prejudice

The most common remedy is a buyout order requiring the respondent (or sometimes even the company) to purchase the petitioner’s shares at fair value. However, the Act affords the court a wide discretion to make such orders as it thinks fit, including regulating the conduct of the company; setting aside transactions; the appointment of liquidators; authorising proceedings in the company’s name; and injunctive relief (such as requiring it to take a certain step, or prohibiting it from doing something).

Share Buyout Orders

An order to purchase a party’s shares can be made against members and non-members. It may sometimes be appropriate to order the petitioner to purchase the majority’s shares.

With the benefit of expert evidence, the court will determine what it considers is fair in the circumstances. While valuations tend to follow certain established methodologies, valuations can still vary substantially, with differing approaches taken to any relevant adjustments.

Though the date of the valuation is normally taken as the date the order is made, that too can vary depending on the specific circumstances of the case and may be fixed at some earlier date.

For a real life example, explore our case study on Lorimer-Wing v Hashmi, in which Napthens successfuly defended an appeal challenging the £3.3 million valuation secured by a minority shareholder following an unfair prejudice claim.

Regulation of future conduct

The court may impose rules on individuals to govern their future behaviour and how the company is operated.

Injunctions

The court may decide to prevent certain conduct from taking place, through an injunction.

Procedure

Proceedings are commenced by petition in the High Court. Cases typically involve extensive disclosure, witness evidence, and expert valuation evidence. The court will closely scrutinise contemporaneous documents, including financial records and board materials.

Alternatives to unfair prejudice claims

An unfair prejudice claim is an effective remedy where a minority shareholder has been treated unfairly, but it is not the only option available. Depending on the circumstances, a shareholder dispute may be resolved through alternative remedies.

For example, a shareholder may bring a derivative claim where directors have caused loss to the company through misconduct. If the relationship between shareholders has broken down completely, a shareholder may seek a just and equitable winding up petition to bring the company to an end.

Shareholders should also consider any rights contained within a shareholders’ agreement, including dispute resolution procedures, compulsory share transfer provisions, or valuation mechanisms for a shareholder buyout.

In some cases, mediation or negotiated settlement can provide a quicker and more cost-effective resolution than formal litigation.

Determining whether an unfair prejudice petition or an alternative shareholder remedy is most appropriate will depend on the nature of the dispute, the commercial objectives of the parties, and the outcome being sought.

Our guide on derivatime claims and our guide on just and equitable winding up petitions offer an in-depth look at these remedies.

Conclusion

Section 994 provides a flexible and powerful remedy. Given the technical and valuation issues involved, early specialist advice is essential to achieving a commercially effective outcome.

Seeking legal support with shareholder disputes

You should consider obtaining advice if:

• You have been excluded from management.
• Information is being withheld.
• Directors are receiving excessive remuneration.
• Your shareholding has been diluted.
• A shareholder agreement is being ignored.
• Directors are acting in conflict with the company’s interests.
• Relations between shareholders have broken down irretrievably.

The earlier advice is obtained, the more options are typically available. Explore our shareholder disputes service page and get in touch today to speak with an expert.

FAQs